Derivatives, Pools, Software, Russian Exports: Compliance

By Ellen Rosen -
Oct 4, 2012

The U.S. Commodity Futures Trading
Commission, facing an Oct. 12 start date for a slate of
derivatives rules, is being bombarded with requests from
lobbying groups to ease or delay the Dodd-Frank Act measures.

Starting Oct. 12, companies must begin tallying their
derivatives trades to determine whether they will be deemed swap
dealers and face Dodd-Frank’s highest capital, collateral and
trading standards, which could erode their profits. The
designation will capture JPMorgan Chase & Co. (JPM), Goldman Sachs
Group Inc. (GS) and the other financial firms dominating a business
that generates more than $30 billion in annual profit for the
world’s largest banks, according to an estimate from financial
consultant Oliver Wyman, a unit of Marsh & McLennan Cos.

The lobbying effort comes as the CFTC and Securities and
Exchange Commission prepare to finally put rulemakings into
effect more than two years after the passage of Dodd-Frank, the
financial-regulation overhaul designed to reduce risk and
increase transparency in the $648 trillion swaps market.

The CFTC has completed 39 rules and “substantive swaps
market reform is now in sight,” Chairman Gary Gensler said in
an Oct. 1 speech in London. The agency has yet to complete rules
governing capital, margin, new swap-trading venues and the
international scope of its measures.

Swaps and other derivatives are financial instruments based
on stocks, bonds, loans, currencies and commodities that can be
used to hedge risks or for speculation. Largely unregulated
trading of derivatives tied to mortgage bonds helped spark a
credit crisis in 2008 after the housing market collapsed.

Regulations that were set to take effect Oct. 1 about risk-management standards between brokers and their clients have
already been delayed after a request from the Futures Industry
Association. A separate rule governing how quickly trades must
be accepted or rejected for clearing prompted requests for
relief from companies including LCH.Clearnet Group Ltd., the
world’s largest interest rate swap clearinghouse.

For more, click here.

Compliance Action

SEC Charges Dark-Pool Operator for Sharing Confidential Data

Dark-pool operator eBX LLC agreed to pay an $800,000
penalty to settle charges that it failed to protect customers’
confidential trading information, the U.S. Securities and
Exchange Commission said.

The payment also settles allegations that eBX, which
operates the Level ATS dark pool, failed to tell subscribers
that it allowed a technology firm to use data about unexecuted
orders, the SEC said yesterday in a statement. The outside
company was identified as Lava Trading, a unit of Citigroup
Inc. (C), in a letter from Level ATS to clients that was obtained by
Bloomberg.

One of the key features of dark pools is that they don’t
identify the firms that buy and sell on their systems and give
out no information about their orders. The platforms are
designed to eliminate the market impact of trading requests by
keeping them out of public view until the moment a transaction
is completed.

“Dark pools are dark for a reason: buyers and sellers
expect confidentiality of their trading information,” Robert
Khuzami, the SEC’s director of the division of enforcement, said
in the statement. “Many eBX subscribers didn’t get the benefit
of that bargain.”

This is at least the third time in the past month that the
SEC has penalized an exchange or brokerage for rule violations.
NYSE Euronext was ordered to pay $5 million to resolve claims
that the New York Stock Exchange gave certain customers a head
start on quotation and transaction market data, and the SEC
charged a New York-based brokerage for allowing overseas clients
to run a scheme aimed at distorting stock prices.

U.K. Antitrust Regulator Delays Review of LSE-LCH.Clearnet Deal

The U.K. Office of Fair Trading has suspended the timetable
for its review of London Stock Exchange Group Plc (LSE)’s acquisition
of a majority stake in LCH.Clearnet Group Ltd. as the companies
try to close the deal by year-end.

The regulator had originally said it would make a decision
by Oct. 31.

LSE sank the most in three years on Sept. 28 after saying
European Union regulations will cut income at its Italian
central counterparty and may require LCH.Clearnet to boost
capital. LCH.Clearnet said it will need to boost capital by 300
million euros to 375 million euros to comply with the rules.

Equiduct Systems Ltd., the European trading system owned by
Citadel LLC and Knight Capital Group Inc., in July told U.K.
antitrust regulators that the combination of LSE and LCH would
stifle competition. The OFT should impose remedies before
approving any transaction and ensure access to the clearinghouse
is maintained, Equiduct Chief Executive Officer Peter Randall
wrote in a letter to the regulator obtained by Bloomberg News.

The deal is also being examined by Portuguese regulators
and has been cleared by Spanish authorities.

California Investment Adviser Faces Fraud Charges, SEC Suit

A San Francisco-based investment adviser faces federal
criminal charges and a civil lawsuit by securities regulators
for allegedly stealing more than $500,000 from an investor.

Hausmann-Alain Banet, chief executive officer of San
Francisco-based Lion Capital Management Group, was arrested
yesterday and charged with wire and mail fraud and money
laundering, according to an indictment unsealed in federal
court. He was also sued by the U.S. Securities and Exchange
Commission.

Banet, 49, allegedly took $544,000 from a client and
falsely claimed that he invested it in a hedge fund. He created
false account statements showing trading gains and spent the
money on personal and business expenses, prosecutors in San
Francisco said in an e-mail. Banet is in custody pending an Oct.
9 bail hearing, prosecutors said.

Operators of Telephone Scam Targeted by Federal Trade Commission

U.S. government regulators announced they won a court order
to halt international telephone scams in which people posing as
computer technicians called tens of thousands of consumers and
duped them into buying unneeded anti-virus services.

The Federal Trade Commission said yesterday that it filed
charges on Sept. 24 in federal court in Manhattan. On Sept. 25,
U.S. District Judge Paul Engelmayer enjoined the scams, mostly
based in India, which targeted consumers in the U.S., U.K. and
other English-speaking countries. The U.S. also froze $180,000
of the defendants’ assets, the FTC said.

The agency said it’s working with international regulators
to increase its investigations of so-called scareware, in which
con artists fool consumers into buying software and services for
their computers they don’t need. On Tuesday, the agency
announced a judgment of more than $163 million against a
defendant in a 2008 case.

The most recent cases are “a very serious rip-off of
consumers,” FTC Chairman Jon Leibowitz told reporters in
Washington yesterday. “The tech scam artists have taken
scareware to a new level of virtual mayhem.”

The telemarketers falsely told consumers they were from
Dell Inc., Microsoft Corp. (MSFT), McAfee Inc. and Symantec Corp. (SYMC)’s
Norton antivirus unit and had detected malware that threatened
their computers, the FTC said in a statement. To show the
computer had a problem, the caller directed the consumers to a
utility area of the computer that falsely showed an infection,
according to the agency.

The callers offered to rid computers of the non-existent
threats for fees ranging from $49 to $450. A separate scam
placed ads with Google Inc. (GOOG) that appeared when computer users
searched for a technical-support number, the FTC said.

Eleven Charged With Making Illegal Russia Military Exports

The U.S. charged 11 people with involvement in an illegal
scheme to export high-tech microelectronics to Russian military
and intelligence agencies.

The case is “the first-ever criminal prosecution of a
large-scale Russian military procurement network operating
within the United States,” said Robert Nardoza, a spokesman for
Loretta Lynch, U.S. attorney in Brooklyn, New York. A federal
indictment dated Sept. 28 was unsealed yesterday.

One of the accused is Alexander Fishenko, an owner and
executive of both the Houston-based export firm Arc Electronics
Inc. and a Russia-based procurement firm, Apex System LLC. He’s
also charged with operating as an unregistered agent of the
Russian government, the Justice Department said.

The microelectronics involved are subject to strict
government controls, the Justice Department said. They can be
used in radar and surveillance systems, weapons guidance systems
and detonation triggers, according to the government. Arc
shipped at least $50 million worth of microelectronics and other
technology to Russia without an export license, the government
said in a memorandum dated Oct. 3.

The defendants if convicted face as long as 20 years in
prison on the most serious charges, violating the International
Emergency Economic Powers Act and the Arms Export Control Act.

The case is U.S. v. Fishenko, 1:12-cr-626, U.S. District
Court, Eastern District of New York (Brooklyn).

Enbridge Told by EPA More Cleanup of Kalamazoo River Needed

Enbridge Inc. (ENB) must do more to clean up a 2010 pipeline
spill that dumped oil in Michigan’s Kalamazoo River, the U.S.
Environmental Protection Agency said.

The EPA yesterday gave Calgary-based Enbridge until next
August to complete its clean-up work in specific areas. The
company must now submit a plan in the coming days to perform the
work.

The pipeline, known as Line 6B, ruptured in July 2010 near
Marshall, Michigan, and spilled more than 843,000 gallons of
oil, according to the agency. The 30-inch pipeline, able to
carry 290,000 barrels a day of heavy crude oil from Indiana to
Ontario, was shut for about two months.

Enbridge is “reviewing” the EPA’s order, which it
received this morning, and will comment further later, Terri
Larson, a company spokeswoman, said in an e-mail. “To be clear,
this is not a formal order or directive,” Larson said.

The oil flowed into Talmadge Creek before entering the
Kalamazoo River, coating birds, muskrats and turtles in an oily
residue. Enbridge has earlier clean-up orders from the EPA, and
those are still in effect, the agency said.

Online Poker Payment Processor Gets Prison Term of Five Months

A Las Vegas man who worked for online poker companies was
ordered to serve five months in prison for helping deceive banks
into processing hundreds of millions of dollars in illegal
gambling transactions.

Chad Elie, 32, was one of 11 people charged in an April
2011 indictment targeting the founders of PokerStars, Full Tilt
Poker and Absolute Poker. U.S. District Judge Lewis Kaplan
sentenced Elie yesterday in federal court in Manhattan.

Prosecutors allege that after the U.S. implemented the
Unlawful Internet Gambling Enforcement Act in 2006, which barred
banks from processing payments to offshore gambling websites,
the three companies worked around the ban to continue operating
in the U.S.

Elie pleaded guilty to conspiracy in March, admitting that
he served as a “payment processor” for the poker companies and
lied to U.S. banks about the nature of the financial
transactions they were processing. In court yesterday, he
apologized for his actions.

Elie’s lawyer, Barry Berke, had asked for a sentence of six
months home confinement followed by probation and community
service, but Kaplan said a sentence without jail time would be
too lenient. Berke declined to comment on the sentence after the
hearing.

In July, Manhattan U.S. Attorney Preet Bharara, whose
office is prosecuting the case, as well as a civil suit against
the three gambling companies, announced a $731 million
settlement with PokerStars and Full Tilt. PokerStars agreed to
forfeit $547 million.

PokerStars agreed to acquire the assets of Full Tilt, whose
U.S. victims will be able to seek compensation from the Justice
Department from the funds, prosecutors said at the time.

The case is U.S. v. Tzvetkoff, 10-CR-00336, Southern
District of New York (Manhattan).

Compliance Policy

T-Mobile Merger With MetroPCS Will Probably Get U.S. Approval

Deutsche Telekom AG (DTE)’s proposal to buy MetroPCS
Communications Inc. will probably win approval from U.S.
regulators who are wary of the market power wielded by industry
leaders Verizon Wireless and AT&T Inc. (T)

“There would be a regulatory hope this would strengthen
both competitors versus the two big guys,” David Kaut, a
Washington-based analyst for Stifel Nicolaus & Co., said in a
telephone interview.

Bonn-based Deutsche Telekom yesterday announced it will pay
$1.5 billion to shareholders of MetroPCS, the fifth-largest U.S.
mobile provider, and merge the company with Deutsche Telekom’s
T-Mobile USA Inc. unit, the fourth-largest carrier.

The new company would have 42.5 million subscribers,
according to data compiled by Bloomberg -- or about 11.7 percent
of the U.S. wireless market, compared with a 58.5 percent
combined share for No. 1 Verizon and No. 2 AT&T. Sprint Nextel
Corp., the third-largest provider, has 15.2 percent

The deal, subject to review by the U.S. Federal
Communications Commission and Justice Department, probably will
be approved because it doesn’t pose threats to competition like
those raised by AT&T’s failed bid for T-Mobile last year, Kaut
said.

“To the extent this acquisition helps strengthen T-Mobile’s position and preserve a four-firm national market, it’s
pro-competitive,” said Allen Grunes, an antitrust lawyer with
Brownstein Hyatt Farber Schreck LLP in Washington. “I’d expect
the Justice Department to look at local markets and then close
the investigation and let the merger go through.”

The FCC under Democratic Chairman Julius Genachowski, in a
break with Republican predecessors, has declined to declare that
the U.S. wireless market is competitive.

Neil Grace, a spokesman for the FCC, which regulates
airwaves’ use, declined in an e-mail to comment on how the
agency might handle the deal.

Gina Talamona, a spokeswoman for the Justice Department,
which would examine the deal for anti-competitive impact,
declined to comment.

The 27 banks with shortfalls that were required by the
European Banking Authority to submit plans for their capital
raising attained a total of 116 billion euros, the London-based
EBA said yesterday. Including aid to Greek and Spanish banks,
European lenders increased their capital reserves by more than
200 billion euros since 2011, according to an EBA report
published on its website.

“The key positive in the response of banks to this
exercise is that 75 percent of the shortfall was raised by
retaining earnings and other measures -- fresh capital,” Andrea
Enria, chairman of the EBA, said in an interview yesterday.

Investor confidence in the EU’s banking industry nosedived
as the sovereign debt crisis faced by countries including
Greece, Spain and Italy worsened last year. The EBA told
European banks in December to raise 114.7 billion euros in new
capital. The agency required banks to keep a core Tier-1 capital
ratio of 9 percent and hold additional reserves, called a
sovereign buffer, to protect against falling bond prices among
euro-area nations.

Banks will be required to maintain their capital levels
rather than pay out the money raised in dividends or bonuses
“to be able to absorb unexpected losses and to support a smooth
convergence” to tougher global standards, known as Basel III,
the EBA said.

The sovereign buffer will remain in place for the time
being, and will be evaluated in the future based on “the market
environment,” the EBA said.

“The necessary backstops have been endorsed by the
corresponding governments and are being implemented” for Monte
Paschi, based in Siena, Italy, and the Cypriot lenders, the EBA
said.